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DCAA Issues Guidance on Dealing with Delinquent Final Indirect Cost Rate Proposals

On February 3, 2014, the Defense Contract Audit Agency (“DCAA”) issued Memorandum for Regional Directors (MRD) 14-PPD-002(R), entitled, Treatment of Delinquent Final Indirect Rate Proposals. As indicated by the title, the guidance addresses steps DCAA and the Defense Contract Management Agency (“DCMA”) will take when a contractor does not submit its final indirect cost rate proposal on time. Before discussing the MRD, some background information on submission of final indirect cost rate proposals is in order.

Contrary to the belief of some DCAA auditors, contractors do not have an inherent duty to establish final indirect cost rates. Instead, contractors are only required to do what is required by the terms of their contracts. In this regard, there is only one standard Federal Acquisition Regulation (FAR) clause, and none in the Defense Federal Acquisition Regulation Supplement (DFARS), that requires a contractor to submit a proposal to establish final indirect cost rates. That one clause is the Allowable Cost and Payment clause, FAR 52.216-7. That clause is only required to be inserted in cost reimbursement prime contracts and is incorporated in Time-and-Materials (T&M) contracts by FAR 52.232-7, Payment under Time-and-Materials – Labor Hour Contracts. However, it only applies to the material portion of T&M contracts, and has no application to labor hour contracts. Neither 52.216-7 nor 52.232-7 is a mandatory flowdown clause.

As stated in 52.216-7(d)(2)(i), the contractor is required to submit an adequate final indirect cost rate proposal to the government within the six-month period following expiration of the contractor’s fiscal year. However, reasonable extensions may be granted by the Administrative Contracting Officer (ACO). As to what constitutes an adequate final indirect cost rate proposal, 52.216-7(d)(2)(iii) lists the elements of an adequate proposal. While the clause does not state what action the government is to take if a proposal is not adequate, FAR 42.705-1 states that the contract auditor will identify potential deficiencies in the proposal and try to resolve them with the contractor. However, if the auditor and contractor cannot agree, then the auditor is to elevate the issue to the ACO for resolution.

In addition to submitting an adequate proposal on time, FAR 52.242-4, Certification of Final Indirect Cost Rates, requires the contractor to certify that there are no unallowable costs in its proposal. If the contractor does not provide the required certification, the ACO may unilaterally establish final indirect cost rates. However, there is nothing in 52.242-4 or 52.216-7 that addresses what the ACO is to do if the contractor fails to submit a proposal or fails to correct what the ACO considers to be an inadequate proposal.

With these contract requirements in mind, let us return to the MRD. The MRD discusses three topics:

(1)  what actions are to be taken in 2014 regarding proposals that are late by 18 months or more;

(2)  what actions are to be taken in 2015 regarding late proposals; and

(3)  actions DCAA auditors are to take to remind contractors of their obligation to submit final indirect cost rate proposals.

As for the actions to be taken in 2014, DCAA will furnish a memorandum to DCMA with a list of contractor fiscal years ending in 2011 or earlier for which DCAA has not received a final indirect rate proposal (> 18 months overdue). DCMA then plans to either obtain an adequate proposal (e.g., within 30 days), or unilaterally establish contract costs as authorized in FAR 42.703-2(c)(1) and FAR 42.705(c)(1).

This plan is problematic for several reasons. First, the two sections of the FAR cited by the MRD are not contract clauses that are binding on contractors. Instead, these sections only provide guidance to contracting officers on how to exercise rights given by contract clauses. Second, neither section addresses a contractor’s failure to submit an adequate proposal on time. FAR 42.703-2(c)(1) relates to a contractor’s failure to certify a proposal as described in 52.242-4 mentioned above. Further, FAR 42.705(c)(1) discusses what the ACO is to do if the contractor does not submit a completion voucher within 120 days after establishment of final indirect cost rates for all years covered by a contract. The contractual authority for this is FAR 52.216-7(d)(6). Therefore, it is questionable whether DCMA has the power to unilaterally establish final indirect cost rates if a contractor fails to submit a proposal to establish final indirect cost rates.

In regards to 2015, starting in January, DCAA will furnish DCMA with a list of contractor fiscal year ends (CFYs) that either are more than six months overdue without valid extension, or considered inadequate for audit. No mention is made of what actions DCMA will take once it receives this list. However, for proposals that are considered to be inadequate, we anticipate that DCMA will evaluate the deficiencies alleged by DCAA and try to resolve the matter with the contractor. Because this concerns a potential dispute concerning compliance with a contract clause, the ACO could issue a final decision under the Disputes clause, FAR 52.233-1, determining that the proposal is inadequate. The contractor then would have to comply with the decision or file an appeal from that decision. However, we do not see any authority for the ACO to unilaterally establish final indirect cost rates as a result of a contractor’s failure to submit a proposal.

The MRD recognizes that DCMA is not the only agency responsible for establishing final indirect cost rates. In this regard, the MRD says that DCAA will provide each administrative agency with its respective list of CFYs for which DCAA has not received a proposal, and request that they obtain the proposal, or unilaterally establish contract costs. Again, we see no authority for an agency to unilaterally establish final indirect cost rates in this circumstance.

As for what auditors are to do in regard to proposals that are currently due, the MRD states that DCAA will no longer send contractors reminder letters reminding the contractor that a proposal is due. Instead, the auditor will send the contractor a letter reminding the contractor that its proposal is due if the contractor is inexcusably late in submitting the proposal. This will be the only reminder that will be sent to the contractor. A copy of the letter will be sent to the ACO. If the contractor does not submit its proposal after receiving this letter, any further actions will be left to the ACO.

In summary, it appears that DCAA and DCMA are on the path to do something for which there is no contractual authority. As a consequence, this can lead to an increase in litigation if DCMA follows through on what the MRD indicates will be the course of action to follow if a proposal is late.

If you have questions concerning this new policy, please contact any of the government contract consultants at Cherry Bekaert.

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